This blog comes from Colorado firm Higgins, Hopkins, McLain & Roswell. Our goal is to use this blog as a means by which to share news and updates regarding construction litigation in Colorado. While we specialize in litigation of complex construction claims, including construction defect matters, we also use this blog as a platform to share thoughts and ideas regarding risk management strategies that can be implemented to minimize the risk of construction related claims.

Wednesday, July 17, 2013

Colorado’s Federal District Court Finds Carriers Have Joint and Several Defense Duties

An issue that has plagued
builders in Colorado construction defect litigation is the difficulty of
getting additional insured carriers to fully participate in the builder’s
defense, oftentimes leaving the builder to fund its own defense during the
course of the litigation.

Many additional insurers offer a
variety of positions regarding why they will not pay for fees and costs during
the course of a lawsuit.Some insurers argue
that, until after trial, it is impossible to determine its proper share of the
defense, and therefore cannot make any payments until the liability is
determined as to all of the potentially contributing policies. (This is often
referred to as the “defense follows indemnity” approach.)Others may make an opening contribution to
defense fees and costs, but fall silent as fees and costs accumulate. In such an event, the builder may be forced to
fund all or part of its own defense, while the uncooperative additional insured
carrier waits for the end of the lawsuit or is faced with other legal action before
it makes other contributions.

Recent orders in two, currently
ongoing, U.S. District Court cases provide clarity on the duty to defend in
Colorado, holding that multiple insurers’ duty to defend is joint and several.The insured does not have to go without a
defense while the various insurers argue amongst themselves as to which insurer
pays what share.

In D.R. Horton, Inc. – Denver
v. Mountain States Mut. Cas. Co., et al.,
Civil Action No. 12-CV-01080, the Honorable R. Brooke Jackson issued an order
on February 25, 2013, ruling on two motions for determination of a question of
law.That case arose out of an earlier
construction defect lawsuit against D.R. Horton, Inc. (“DRH”), involving the
work of several subcontractors.DRH was
named as an additional insured on several of the subcontractors’ policies. Those
insurance carriers agreed to defend DRH, but then refused to pay or paid only a
small portion of DRH’s defense costs. DRH subsequently filed a lawsuit against
the carriers, in part, for breach of contract for failing to defend, and bad
faith liability under C.R.S. § 10-3-1116.

The first issue before Judge
Jackson was whether or not DRH was a “first party claimant” under C.R.S. §
10-3-1115 and entitled to benefits owed directly to it under an insurance policy.Mountain States argued that since the
underlying litigation arose from claims against DRH, that DRH was not a “first
party claimant.”The Court disagreed,
and held that the policies entitled DRH to the benefits of a defense.Therefore, as a “first party claimant,” DRH
was able to maintain an action against the insurers under C.R.S. § 10-3-1116,
arising from an unreasonable delay or denial of a claim, and could seek
recovery of reasonable attorney fees, court costs, and two times the covered
benefit.

DRH also sought a ruling as to
whether the multiple accepting insurance carriers each had joint and several
duties to defend. The U.S. District
Court held in favor of DRH, stating, “the allocation of defense costs is
a matter to be worked out among the insurers and, if they cannot do so, then by
a court.The insured does not have to go
without a defense or fund its own defense while the insurers argue amongst
themselves.”

Judge Jackson cited an order in the
similar matter of D.R.
Horton, Inc. – Denver, et al. v.
Travelers Indem. Co. of America, et al.,
Civil Action No. 10-CV-02826, 2012 WL 5363370 (D. Colorado).That case, now settled, also involved
litigation between DRH, an insurance carrier, and several subcontractors that
had agreed to obtain additional insured coverage for DRH.There, the Honorable William J. Martinez
issued an order on October 31, 2012, concerning numerous dispositive
motions.Both DRH and Travelers moved
for summary judgment on the issue of whether an insurer’s duty to provide a
defense is a joint and several obligation.Judge Martinez stated that while Colorado courts have not affirmatively
resolved this issue, sufficient authority indicates that the Colorado Supreme
Court, “would hold that each liability insurer has a duty to provide a complete
defense, such that a liability insurer who breaches this duty can be found
liable for the entire amount of defense fees and costs (and that insurer can
then seek equitable contribution from any co-insurer).”The Court granted DRH’s motion with respect
to joint and several liability, holding that DRH was entitled to recover from
Travelers its full, uncollected defense fees and costs.

Another issue in Judge Martinez’ order denied a motion for
summary judgment brought by a subcontractor, seeking to limit a broad duty to
defend arising from a failure to procure insurance as it had agreed. Travelers
brought claims for contribution against several of DRH’s subcontractors on the
underlying project.One of the
subcontractors, Ark Construction (“Ark”), moved for summary judgment, arguing
that (1) it was not a “co-insurer” of the builder; and (2) if it was, it did
not insure the same risk as the insurance carrier.The subcontract required Ark to carry
insurance naming DRH as an additional insured, but Ark failed to do so.The
U.S. District Court held that, due to Ark’s breach, Ark assumed a complete duty
to defend DRH (resulting in potential joint and several liability for each
insurer).Here, the Court relied on Steamboat
Dev. Corp. v. Bacjac Indus., Inc., 701 P.2d 127 (Colo. App. 1985), and
Richmond v. Grabowski, 781 P.2d 192, 194 (Colo. App. 1989),
which held, “In general, the party who agrees
to procure the insurance and fails to do so assumes the position of the insurer
and, thus, the risk of loss.”

Judge Martinez’s order also discusses the majority view in other
jurisdictions, which holds that the duty of an insurer to defend extends to a
defense of the entire case, and that each of multiple insurers is severally
liable to the insured for the entire cost of the defense.These recent U.S. District Court orders
clarify that the law in Colorado follows the majority view.

For additional information regarding this or any construction law issues
in Colorado, you can reach Bret Cogdill by e-mail at Cogdill@hhmrlaw.com or by
telephone at (303) 653-0046.

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Disclaimer

The information contained in this blog is provided for informational purposes only. It is not legal advice and should not be construed as providing legal advice on any subject matter.

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